Free Cash Flow (FCF): Formula, Calculation and Why It Matters
Free Cash Flow (FCF) is the cash a company generates after accounting for capital expenditures. It's a key metric for valuation and financial health.
Free Cash Flow Formula
FCF = Operating Cash Flow - Capital Expenditures
Or equivalently:
FCF = EBITDA - D&A Taxes - CapEx - Working Capital Changes
Why FCF Matters
- Valuation: FCF is used in DCF models
- Debt repayment: Cash available to pay debt
- Dividends: Cash available for distribution
- Acquisitions: Cash for buying other companies
FCF vs EBITDA vs Cash Flow
| Metric | What it measures |
|---|---|
| EBITDA | Operating performance (pre-capital) |
| Operating Cash Flow | Cash from operations |
| Free Cash Flow | Cash available for distribution |
Example Calculation
| EBITDA | $1,000,000 |
| Less: D&A Taxes (approx) | ($150,000) |
| Less: CapEx | ($200,000) |
| Less: Working Capital Increase | ($50,000) |
| Free Cash Flow | $600,000 |
Key Takeaways
- FCF = Operating Cash - CapEx
- Used for DCF valuation
- Shows cash available for debt, dividends, growth
